India: Time To Fine-Tune Companies Act

We are at the closing of the first year of implementation of the
new Companies Act. Such has been the level of ambiguity that
companies, this past year, were clueless about even carrying out
routine corporate actions—wondering whether the old law or
the new law applied as both statutes ran simultaneously and, at
times, even overlapped. The result was a huge backlash from Indian
and foreign corporates alike, with some even demanding the
Act's repeal or a prudent re-write to make it simpler and
clearer. A repeal isn't likely. So, let us examine the areas
where clarifications and simplification are needed.

Let's begin with private companies. They have been waiting
for exemptions from certain provisions right from the time the
ministry of corporate affairs (MCA) notified the draft exemptions
in June 2014. To be effective, the draft exemptions will have to be
cleared by Parliament; so, exemptions must be laid in the ongoing
Parliament session. Private companies had more than 40 exemptions
under the old law and now, less than half survive. The larger issue
relates not to giving piecemeal exemptions, but to the same
regulation being extended to private companies running small
businesses as is extended to large corporations with public funds.
Ideally, the private companies with borrowing or turnover within a
certain prescribed amount should be spared from regulatory
interference. Further, the Act treats private companies with listed
securities as listed companies; this needs correction—it is
too harsh for such companies to comply with the requirements
applicable to a listed company.

Another issue is the ambiguous meaning of 'deposits'.
The Act requires companies to repay unpaid deposits by March 31,
2015; but, sans an explanation to the contrary, companies are
unclear about whether anything which was not a deposit under the
old Act also needs to be paid by March 31 2015? This needs urgent
clarification.

It is unclear if the foreign parent of an Indian company
qualifies as related-party. The definition of related-party in the
Act uses the word 'company' which, as a settled principle,
means an Indian company and not a foreign company. Hence, the
confusion. Another faulty definition is of 'holding
company'. Here, too, the phrase 'a company' is used,
making it unclear if it excludes a foreign holding company? The
definition of 'foreign company', read with the definition
of 'electronic mode', creates another concern.
'Electronic mode' means carrying out business
electronically, web marketing, advisory and transactional services
by e-mail, mobile devices, social media, voice or data
transmission. It is quite common for foreign companies to do
electronic transactions in India. If not clarified, this could mean
they have a place of business in India and the related consequences
will follow. The Act does not allow preferential allotment of
partly paid-up shares. RBI had recently liberalised this and permitted
foreign investors to take up partly paid-up shares. The irony is
when the company law allowed this, RBI didn't and, now when RBI
allows it, the Act does not permit it. The MCA should modify this
to align it with RBI regulation. Another instance of discord is the
time permitted for share allotments. RBI permits 180 days of
receipt of money but the Act only allows 60 days. This, too, needs
correction.

Not just RBI regulations, the Act also conflicts with Sebi
regulations. Alignment is needed to simplify business for listed
companies. For instance, Sebi should modify the meaning of
'postal ballot' in Clause 35B of listing agreement to sync
it with Section 110 of the Act. Further, the Act should reconsider
the applicability of forward-dealing contracts and insider-trading
of securities in unlisted companies. It is rather strange that such
provisions of the Act apply to unlisted companies.

Few clarifications are needed with respect to issue of
securities. The requirement of having an issue size of at least
R20,000 of 'face value' of shares per person appears
illogical as it ignores the present day reality of issues of shares
at premium. Concept of 'issue value' should be used instead
of 'face value'. Another ambiguity is whether the maximum
term for unsecured debentures is the same as that for secured
debentures, 10 years. The letter of law suggests that unsecured
debentures can have a longer term but surely a clarification is
needed to resolve this.

A debatable and unresolved issue is the meaning of
"ordinary course of business" in the context of loans to
directors and persons connected with directors. There are two
divergent views and both have convincing arguments. One suggests it
means the 'usual course of business' while the other means
the 'principal business of the company'. Getting clarity
here is a must.

Lastly, complete exemption from Section 186 should be given for
transactions between holding company and wholly-owned subsidiaries,
and also in the cases weher the loans are granted to employees in
the course of their employment.

Another issue is the stringency of the penalties. Interestingly,
the word "fine" appears 189 times in the Act,
"penalty" 41 times, "prosecution" 24 times,
"imprisonment" 76 times, making corporates and
office-bearers subject to rigorous provisions of law with no
respite. Why does the law need to imprison directors or
office-bearers for sundry defaults like not filing returns/
information/ disclosures, etc, which have no bearing on any other
stakeholders/the government? This isn't very different from
having the right to arrest and imprison ordinary citizens for
breaking a traffic signal, or parking violations, or 100 other
small offences or breach of rules that citizens commit fairly
regularly albeit with no significant fallouts. Is this our idea of
a simple corporate law? FERA was repealed to make place for the
easier FEMA, with only monetary fines. The Act should have similar
provisions, at least for trivial offences.

Originally published by The Financial Express, March 4,
2015.

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